Can Shanghai Disneyland Survive China's Downturn?

Cinderella Castle, part of the Shanghai Disney Resort, under construction this past January. (JOHANNES EISELE/AFP/Getty Images)

Shanghai Disneyland, which opens June 16, will make a “loud statement” said Walt Disney Company CEO Bob Iger at the Deutsche Bank 2016 Media, Internet & Telecom Conference on Tuesday.

He’s right. Although Disney has only a 43% stake in the park—a state enterprise, Shanghai Shendi Group, owns the rest—the investment should substantially change the way the investment community views Iger’s company, although perhaps not in the way he envisions.

The destination, costing $5.5 billion and covering 963 acres, will be a wonder to behold, as pictures, released by the company on March 8 to mark the 100-day run-up to the opening, reveal. Six “themed lands” will surround the 196-foot Enchanted Storybook Castle, the tallest Disney castle anywhere. At no other Disney park will you find Treasure Cove, one of the six lands. There, expect to enjoy Pirates of the Caribbean attractions.

Want to see the Lion King in Mandarin? There’s only one place to go.

And say hello to Mulan, in Fantasyland, from the Voyage to the Crystal Grotto water ride, or dodge Stormtroopers on the Star Wars attraction in Tomorrowland. If you’re a Tron or Toy Story fan, you will not be disappointed.

But don’t expect to stroll down Main Street, U.S.A. It’s at every other Disney park around the world—there’s a different name in Tokyo—but you won’t find it in Shanghai.

The glaring omission, however, may not be important. After all, the best thing about the park if you’re a Disney shareholder, which I’m not, is that it is in China. Iger thinks there are “well over” 300 million people who can afford a ticket and who live within three and half hours of its gates. As the Disney chief tells us, that’s a group about the size of the United States.

And there are plenty of Chinese in the demographic that matters most for Disney. Some 60% of the visitors to Tokyo Disneyland are aged 4-17, and China has 200 million people in that population cohort.

Chinese of all ages will flock to Disney’s new project, which benefits from its location in the most populous of China’s four so-called Tier 1 cities. Shanghai sits on the mighty Yangtze River, and as Naomi Ng of the South China Morning Post suggests, Disney will benefit from the transportation links that city has by virtue of being at the mouth of that 3,915-mile artery, the third-longest river in the world. No wonder China International Capital Corp. believes the park will enjoy “sustained popularity.”

How could it not be popular? Last year, there were, according to the China National Tourism Administration, 4 billion trips to Mainland China destinations. That meant 4 trillion yuan in tourism revenue.

For Disney, the numbers mean renminbi in the bank. China International Capital Corp. estimates there will be 11.5 million visitors in first year of operation.

The estimate looks conservative. For one thing, Disney products are already popular in China. And even more important, both the Shanghai Municipality and the central government recognize that the high-profile park’s success is important to them, so they will act accordingly.

Yet there is one problem. Ng of the South China Morning Post notes that analysts believe “Shanghai Disneyland will lead China’s tourism industry growth despite the country’s current economic woes.”

Those woes bring us to the worst thing about Shanghai Disneyland: The park is located in China.

In that country, the economy is obviously in distress.

So is Iger worried? “We build things to last many years,” he told CNBC last July. “Disneyland was built 60 years ago and has been through the ups and downs of the U.S. economy for six decades.”

In those six decades, however, the U.S. never faced a situation as serious as the one now confronting China’s technocrats.

Those technocrats are now running what has become known as “the two-track economy.” “There is the bad old industrial economy—credit-fueled and investment-led, resulting in chronic overcapacity and unsold apartment blocks,” writes the Financial Times’s Tom Mitchell. “And there is the good new services economy—innovative and consumption-driven.”

That new economy, powered by consumption, is crucial to Shanghai Disneyland. Yet analysts overestimate the potential of Chinese consumer spending. Even if consumption accounted for 66.4% of China’s GDP last year—doubtful for many reasons—the rise of the free-spending Chinese is just about over.

Just ask one of the most bullish analysts of the Chinese economy. “Consumption doesn’t drive growth,” writes Yukon Huang of the Carnegie Endowment for International Peace. “It’s the result of growth.”

And as Anne Stevenson-Yang of J Capital Research notes, China’s growth as well as its consumption are the result of now-condemned investment. “Chinese consumption requires ever larger injections of cash,” she writes in a February 15 research note titled “China’s Household Wealth.” “This means that, if and when the investment-driven economy collapses, consumption will also cave in.”

As Stevenson-Yang points out, “a stunning amount of cash must now be poured into the open maw of the economy simply to keep the ATMs open.” In the long-term, the success of its park in Shanghai depends on a transition from an investment-led economy to a consumption-based one. If that move does not occur—and Chinese leaders are pouring on the investment as growth slows, in-country wealth erodes, household income falls, and indicators point to even weaker employment ahead—then the long-term prospects of the park are questionable.

Yet color Iger optimistic. “We’re not concerned with the Chinese economy and we’re extremely bullish about the long-term prospects of it,” he told CNBC in his July interview.

And he also mentioned to the channel that Shanghai Disneyland is one of his company’s “most important projects.” “Growing in China is a huge priority for us and our primary approach in terms of growth is this park, so obviously it’s extremely important and very exciting,” Iger said.

Disney is making a large bet on Shanghai—and China—at what increasingly looks like the wrong time. China’s downturn could last decades, and it’s not clear Disney will want to wait that out.